All i’s on Apple

Like an expectant father pacing the waiting room floor to learn the gender of his newly born child, the U.S. stock market has been in a holding pattern for the past week anxiously awaiting tomorrow’s announcement from Apple regarding the most recent iteration of its enormously popular iPhone, a new electronic payment system, and perhaps its newest product innovation.

The reason this event carries so much weight is that Apple, with a market capitalization of $588 billion, is the single most valuable publicly traded company in the world. That means its price action has the biggest impact on the overall value of the S&P 500 Index, which is a capitalization-weighted index that assigns value based on the relative size of each of its component companies.

And the reason that matters is that almost every form of diversified mutual fund, retirement account and managed portfolio owns a big chunk of the S&P 500 Index, and by extension a fairly large piece of Apple. In other words, as Apple goes so goes the S&P500 Index and everything else that is based upon its value – which is probably a lot more than most people realize.

In addition to the actual money in Apple stock, there is even more invested in “derivative” products, some of which are highly leveraged (options, futures, etc.), that change in value as does Apple. This has the effect of amplifying its price movement in either direction, which in turn triggers limit orders that further exaggerates the price movement in whatever direction it is headed.

If the reaction to the Apple iPhone 6 and/or long awaited “iWatch” is positive, it will not only propel the price of Apple stock higher but would go a long way towards pushing the S&P 500 Index upward as well. But if the response is tepid, that very well could push the entire market down in sympathy. And if you are looking for an excuse for the entire stock market to purge itself of recent excess, tomorrow may well be the day that the long expected correction begins in earnest if Apple disappoints.

Personally, I have a lot of faith in Apple and believe it will continue to produce innovative products for which consumers will be willing to pay a premium, thereby perpetuating Apple’s exceptional profitability. And as the mystique of Steve Jobs slowly fades, Tim Cook is emerging as an astute CEO who will not be bullied into taking self-serving behavior to pacify short-sighted investors.

However, I am not as sanguine about the rest of my fellow tech investors, many of whom have developed an insatiable appetite for outsized returns. At least Apple has the profitability to match its exceptional recent performance, but can the same be said for the social media stocks and content companies trading at triple-digit multiples?

In next week’s issue of STI we will take a close look at Apple’s announcement, along with our take on the “wearable tech” market. It’s too early to predict with accuracy just how big of a market this may become, but it’s not too early to start sorting out the early winners and losers.

NASDAQ Composite Index:                                                                     

Friday, September 5 = 4,582.90                                           

Year to Date = + 10.6%                                     

Trailing 7 Days = + 0.1%                                   

Trailing 4 Weeks = + 2.8%

Next Wave Portfolio Update: Silicon Motion Technology

By Rob DeFrancesco

Earnings estimates at Silicon Motion Technology (SIMO) were ratcheted up in early July after the company positively pre-announced second quarter results, citing strong demand for its high-performance, low-power solutions for mobile storage and communications. The company, a leading provider of embedded controllers for smartphones and tablets, is seeing success thanks to its solutions garnering greater adoption across various platforms.

In Q2, revenue rose 19% to $69.4 million, with EPS of 41 cents beating the consensus estimate by five cents. On a sequential basis, gross margin of 52.2% gained 360 basis points and operating margin of 23.5% was up 680 basis points.

Revenue in the June quarter from mobile storage products of $58.8 million (85% of total revenue) advanced 30% sequentially. While about a third of this business still represents older use cases (flash cards and USB drives), the real growth these days is in embedded flash controllers and solid-state drive (SSD) controllers, which saw combined revenue advance 65% sequentially.

In the embedded multimedia card (eMMC) segment, Silicon Motion has about a 25% market share. The vast majority of the remaining share is dominated by flash original equipment manufacturers (OEMs) utilizing their own controllers. However, Silicon Motion’s newest products are helping it secure design wins and gain share. The company is now shipping eMMC controllers in devices from all of the top 10 non-iOS smartphone OEMs, adding two in the latest quarter. For 2015, management’s goal is to boost the company’s eMMC market share to 40%.

When it comes to SSD controllers, Silicon Motion is relatively new to this segment, with just $15 million to $20 million in revenue expected this year. Driven by new relationships, management expects a 3x to 4x increase in 2015 SSD revenue. The company’s main competitors in this segment: Marvell Technology (MRVL) and the LSI unit of Avago (AVGO).

In SSDs, the majority of Silicon Motion’s business this year has been with module makers focused on selling into the retail channel. The company is increasingly targeting SSD OEMs that are leading suppliers into the PC channel (solid-state drives are increasingly replacing traditional hard drives). These SSD OEMs tend to have good relationships with flash OEMs, an important benefit when flash memory supplies are tight.

Silicon Motion in Q2 secured some important SSD controller design wins, including a platform win with an SSD OEM customer targeted at PC OEMs that’s on schedule for mass production starting in the first half of next year.

For Q3, Silicon Motion’s guidance: sequential revenue growth of 15% to 20%, or revenue of $79.8 million to $83.3 million. This was above the consensus estimate of $71.6 million. Gross margin is expected to be fairly stable sequentially, in the range of 50% to 52%.

For 2014, the company sees revenue growth of 22% to 27%, up from previous guidance of +5% to +15%. The 2014 consensus EPS estimate now stands at $1.52, vs. $1.27 at the end of June. The 2015 consensus of $1.91 (up from $1.50 during the same period) indicates growth of more than 25%. At recent prices, Silicon Motion shares trade at a forward P/E of 14.8 on the 2015 consensus EPS estimate.

Silicon Motion Technology remains a buy below $25 in the STI Next Wave Portfolio.